Pushing the Envelope Blog

If you’re a shipper, you may have noticed your fuel surcharge fees aren’t going down in step with the declining price of oil. That’s because both FedEx and UPS tie their fuel surcharges to the price of diesel, which hasn’t dropped as far or as fast as gasoline prices. Furthermore, both shipping giants recently adjusted how they calculate fuel surcharges, resulting in surcharges that won’t drop as much as they would have under the previous calculation. In some cases, fuel surcharges are even going up.

Fuel surcharges are common in the transport industry, from taxis and airlines to moving and delivery companies. Many of these industries instituted fuel surcharges to smooth out costs when fuel prices were skyrocketing. But in times of low fuel prices, like now, customers see these surcharges as a blatant money-grab.

Right about now, you may be noting the U.S. Postal Service doesn’t have a fuel surcharge. It also didn’t go all in on dimensional weight pricing (See our previous blog). And it’s not likely to chase the next big thing in pricing: “surge” or “peak” pricing. For the 2015 holiday season, UPS said it plans to follow the Uber model and hit shippers with “peak” prices on its busiest days. This comes after UPS said it experienced higher-than-anticipated 2014 peak season expenses. FedEx is expected to follow suit. For consumers, this could mean the end of free shipping, at least on last-minute orders around the holidays.

So, the Postal Service might look even more attractive these days with its relatively straightforward, consistent pricing. Of course, the Postal Service isn’t a public company, so it’s not under the same pressure to deliver profits as UPS and FedEx are. But customers are not too interested in the whys and wherefores – they just want low-priced, reliable, fast delivery.

Do you think the Postal Service is well-positioned to lure away commercial package business from FedEx and UPS? Does the lack of a fuel surcharge put the Postal Service at any kind of a competitive disadvantage? Or is it only advantageous? Do you see the Uber surge or peak pricing model getting a foothold in other industries?

Don’t let the decline in mail volumes over the past few years fool you. People still place a high value on postal services. Postal customers especially value being able to interact with postal employees at a Post Office as compared to other retail alternatives. And while some people might be indifferent to Saturday delivery of letters, they still value Saturday delivery for packages.

These discoveries are among the key findings in our first-in-the-U.S quantitative survey on the value people place on the services the U.S. Postal Service provides as part of its universal service obligation (USO). In our earlier report on the USO, which looked at the collection of requirements that ensure all users of postal services receive a minimum level of service, we pointed out the need for a quantitative study – one that asks people if a higher level of service is valued enough to warrant the additional cost. We recently conducted such a study, What Postal Services Do People Value the Most?, with market research firm Gallup and postal economist Michael Bradley.

The new study asked respondents to consider four aspects of the USO:

Mode of delivery;

Access to postal services;

Frequency of delivery; and

Price.

We learned household customers place a high value on getting mail delivered to their door or to a curbside box rather than to cluster boxes or parcel lockers. Even for parcels, household consumers don’t like cluster box or parcel locker delivery, our survey found. At the highest parcel price in the survey, more than half of consumers would prefer paying the higher price to have delivery to the door, suggesting convenience trumps other factors for customers.

And it turns out that people really like to go to the Post Office. Both households and businesses have a strong preference for visiting post offices for retail services over alternative access points, including kiosks. However, respondents were satisfied with keeping post offices open for just a few hours, and placed minimal value on normal business hours.

Yet for all services, respondents indicated a limit to the amount of postage they would pay as a trade-off for higher levels of service. It seems both household and business customers value lower prices and might be willing to accept lower levels of service to keep prices from rising sharply.

We welcome your input on our survey results. What aspects of the USO are most important to you? What levels of service do you feel the Postal Service should continue to provide?

What if your credit card company told you: “You will charge a million dollars on your credit card during your life; please enclose the million dollars in your next bill payment. It’s the responsible thing to do.” Doesn’t seem quite right, does it?

Well, that’s what the U.S. Postal Service’s requirement to prefund its long-term pension and healthcare liabilities is like. The Postal Service is required to pay the full estimate of its liabilities, currently estimated at nearly $404 billion, even as that estimate moves around and is based on assumptions that are highly uncertain and can frequently change over the life of the liability. Our recent white paper, Considerations in Structuring Estimated Liabilities, evaluates these assumptions and other considerations and shows the Postal Service is closer to being fully funded, or potentially overfunded, when certain assumptions are reasonably adjusted or considered.

First, let’s look at current funding levels. The Postal Service has set-aside cash totals of more than $335 billion for its pensions and retiree healthcare, exceeding 83 percent of estimated future payouts. Its pension plans are nearly completely funded and its retiree healthcare liability is 50 percent funded – much better than the rest of the federal government. But getting to this well-funded position has been painful. The Postal Service’s $15 billion debt is a direct result of the mandate that it must pay about $5.6 billion a year for 10 years to prefund the retiree healthcare plan. This requirement has deprived the Postal Service of the opportunity to invest in capital projects and research and development.

As things stand now, retiree healthcare, pensions, and workers’ compensation are unfunded by about $86.6 billion. But our paper says any discussion of unfunded liabilities should take into consideration assets that could be used to satisfy the liabilities, such as real estate. The Postal Service’s real estate assets have a net book value of $13.2 billion. But fair market value of these properties is estimated as high as $85 billion. Neither is factored into the Postal Service’s ability to meet future liabilities.

In addition, the liabilities are not exact or static amounts and they require certain assumptions, such as interest rates and demographic inputs, to estimate the future costs of these programs. For example, interest rates are at historic lows. Even slightly higher interest rate assumptions would reduce or eliminate the estimated liabilities.

Our paper details how different assumptions and considerations would affect the liabilities. Basically, if the Postal Service’s real estate assets were considered and one other assumption adjusted, the long-term liabilities would be overfunded.

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